Sunday, January 31, 2010

There is hope for Honduras after all. Last week the country installed a new president, and the ousted president, his term of office expired even if he had not been impeached, agreed to go into exile rather than face a trial for the illegal election he tried to hold. Foreign observers, from countries that had objected to the impeachment and removal from office of the former president, failed to find any fault with the presidential election, which went ahead as scheduled with candidates who were selected before the impeachment took place, and most countries have recognized the result.

This outcome doesn’t entirely resolve the constitutional crisis in Honduras, but at least it defuses it. Serious problems in the constitution there will have to be resolved eventually, but at least that will happen legally, and not through the efforts of an outlaw president to seize power and suspend the constitution.

The response of foreign governments and international organizations to the crisis in Honduras was downright shameful, and the United States and its Secretary of State Hillary Clinton and President Barack Obama, along with the Organization of American States, Venezuela, and Brazil, particularly deserve criticism for their attempt to suspend the rule of law in Honduras and install a dictator there. It is true enough that the ousted president held political positions that were favorable to these countries and organizations. But Honduras is not an enemy country. Maintaining the rule of law there is more important, and more beneficial in the long run, than any short-term political gain that might have resulted from overturning the law. One of the problems in suspending the rule of law is that it can be very difficult to bring it back. Honduras faces challenges, but at least it does not face that challenge.

Saturday, January 30, 2010

Three years after eBay launched its makeover plan, the results are mixed: revenue and profit are down, but at least the company is still there. The plan was to turn what had been the world’s go-to auction site into a retail aggregator along the lines of Buy.com. EBay started by booting out about half of its sellers. It raised fees to discourage those that remained. It replaced the sellers by launching strategic arrangements with a handful of big corporations, though not as many as it had planned on — competing with Buy.com is not as easy as it looks. The challenge it faces now, though, is how to replace the buyers it lost along the way.

Customer traffic on eBay is starting to come back, and in the December rush, it finally came close to what it had been at its 2005-2006 peak. The problem is that most of the site visitors are browsing, but not buying anything. And there are good reasons for that, especially in the Christmas 2009 shopping season. Shoppers went to eBay looking for the bargains that they could not find in local stores, but they could not find them on eBay either. The rush of traffic to eBay last month could prove to be a mixed blessing. Some customers ended up buying something, to be sure, but millions who hadn’t kept up with the site found out that eBay is no longer a place where you can find interesting things at low prices.

It is hard to fault eBay for moving away from auctions to the more traditional fixed-price listings of a retail aggregator. Most auctions were an abuse of buyers’ attention. A buyer might spend 15 minutes evaluating an item and a seller in order to place a bid, when in most cases they had no chance of winning the item. But one of the unintended consequences of fixed-price listings is obvious if you take a quick look at the listings on eBay. A significant fraction of items, in some categories more than a fourth, are listed at sucker prices, three to twenty times what the item is worth on the open market. Sellers list thousands of items, hoping that careless buyers will come along and buy one of them by accident every now and then. (It may be, also, that a seller is too busy to set prices for its miscellaneous items, and is using a computer program to determine the prices.) Used books that sell for $5 elsewhere list for twice the new price. Much of the clothing is at the original retail price or higher at the same time that it is 70 percent off in the stores. The auction format at the old eBay, with the large number of active listings, at least gave buyers a way to gauge the value of an item. The new word on eBay is buyer beware, at least when it comes to prices.

The large number of junk listings on eBay is another regrettable consequence of its change in strategy. It used to be that sellers listed items on eBay in order to sell them, and the listings, even if renewed, expired in less than a month. Now only a tiny fraction of listings result in sales. EBay’s insider sellers can list thousands of items that probably no one will ever want, at least at the prices that are offered, and the listings stay there seemingly forever. EBay’s retail customers can also list a few items per month at no charge, and many of these listing are equally dubious, yet seem to come back month after month.

EBay continues its efforts to increase the number of listings, and the numbers say it is succeeding in changing this one metric. The changes would not seem to benefit buyers, though — there are actually fewer things to buy on eBay because the sellers that sold all the interesting items are gone, and it abuses buyers’ time in a new way to force them to sift through all the junk listings. Worse for eBay, the large number of long-term, inactive listings for products gives the site an air of stagnation. If you visit a category on eBay and see the exact same listings as the year before, you tend to get the feeling that this is a site where nothing ever really sells. That isn’t really true — a large seller may have 10,000 units of an item to sell, and it could take years to sell them all, but you can’t tell that by looking at the listings. People who are expecting to find the old eBay can imagine they are looking at a listing for a single unit of an item that no one is interested in. The result is a site where there is no longer any urgency to buy anything. If anything, the eBay experience now encourages buyers to wait if they can, in the hope that sellers might lower their prices.

I visited a flea market in December too, and it didn’t have the air of activity that a flea market traditionally is supposed to have. There were lots of things you could buy, but the prices weren’t particularly low, and a lot of the items seemed to be the same ones I had seen the year before. There were a handful of shoppers looking around but I didn’t see anyone actually buying anything. That’s basically what eBay looks like now.

A recent CNNMoney.com story sought to follow up on a sellers’ boycott of eBay two years ago. While the story mischaracterizes the boycott and the issues involved — it was not really about the feedback system, but about a disparity in fees that gave large corporate sellers an enormous advantage over small-business sellers — it does give you an idea of how eBay is doing now. It has fallen behind Amazon in buyer awareness, and its small-business sellers find themselves wishing another company would come along to replace it:

More than half of those polled had a negative opinion of eBay. While a majority called Amazon an “excellent” channel to drive sales, only 23% felt the same way about eBay.

And remember, this is eBay’s reputation among its current pro sellers. Try to imagine how its former sellers, in both the pro and household categories, feel about it — and that’s a considerably larger group, numbering in the millions.

EBay’s prospects are not as favorable as its financial results suggest. It reports only a slight decline in revenue, but fee increases and gains in its PayPal subsidiary and foreign operations obscure a downward trend in U.S. marketplace transactions. EBay’s novelty effect will wear off in other countries too. Its cost structure is too high for it to ever regain the low-price position in any market — sellers have to sell at higher prices on eBay to cover the high fees. At this point, eBay is still searching for a strategy that will allow it to remain relevant in the long run.

Friday, January 29, 2010

Put together a struggling developer and a struggling bank, and there is a very good chance that someone will start pointing fingers. Lawyers, the good ones, don’t need anyone to tell them to start taking notes.

I am getting a local perspective on this now. Near here, a developer had planned a sprawling multi-use development on the largest piece of undeveloped land in the neighborhood of a large corporate enter, also taking over the land occupied by a lumberyard. Progress on the development has been so slow that local residents struggle to remember what was there before the construction vehicles moved in. Yet the only thing that has been built so far is a supermarket, and that happened apparently just because the supermarket was providing the financing for their building. The supermarket was to have opened in 2007, and construction on the building could wrap up a few weeks from now. With one building complete, the development ought to be a partial success, but the supermarket cannot plan its opening because access roads have not yet been built. The project’s other retail and office tenants have vanished. Some were forced by the delays to move on, some faced cutbacks because of the recession, and others apparently never existed in the first place. And naturally, given the state of the housing market, the luxury condos that were to have been the cornerstone of the project have been postponed indefinitely.

So who’s to blame? The developer blames the lead lender, and filed an $8 billion lawsuit this week. The bank has not released a statement on the suit yet, and probably will not have to say anything if they can get the case dismissed. Yet if that happens, it will not exactly be a victory for the bank. If this case follows the usual pattern, the developer will be liquidated in bankruptcy and the bank will take a loss of $40 million or more after it forecloses. The supermarket may be able to take possession of its building at some point, but with lawyers having to make their points in multiple courts, there is a risk that even that obvious first step may be delayed for a year or more.

What jumps out at me when I look at this story is the massive waste that the development project, and the lenders’ decision to finance it, created. Even in the absence of a recession, there was little chance that this project could have been completed. As evidence of this, the project was already falling apart three years ago, in a time when most business people had an optimistic view of the economy. This is not just a story of money moving around, and some getting lost along the way. A lumberyard, which had been operating at a profit, is gone. I would guess at least 20,000 worker-hours of demolition, tree removal, and earth-moving took place, not counting the work on the supermarket. And basically all of this work was for nothing. The bad decisions that lenders make can ruin a bank, but they are also a problem for the economy as a whole. They lead to wasted resources on a massive scale. The one failed local project is bad enough, but they same thing is happening across the United States and in a dozen other countries. Multiply the miscalculations of this one project by a few thousand, and the scale is large enough to upset the global economy. The totality of the work that has gone to waste is of greater consequence, in the long run, than the loss of a few hundred banks.

Developments this week: Sloppy financial reporting is blamed for a liquidity crisis in Greece, where the country was slow to recognize the need for drastic cost-saving measures. Details of emergency financing for the country’s debt are reportedly being worked out, but budget cuts will have to come first. ◾ Senate leaders put off the vote on the reappointment of Ben Bernanke as long as possible, worried that they might not have a majority. When the vote was finally held yesterday, Bernanke was confirmed by more than 2 to 1, but it was still the narrowest margin of any Fed chair ever. ◾ WaMu (Washington Mutual) shareholders will be represented in bankruptcy court, a judge decided today. Shareholders’ estimates of money left for them at the end of the bankruptcy liquidation are probably hopelessly optimistic, but the court decided that it was too soon to come to that conclusion. The WaMu holding company was driven into bankruptcy by the creative mortgage lending of its banking subsidiary. ◾ Harleysville National Bank reported a slight improvement in its December 31 balance sheet. If the numbers stand up to regulatory scrutiny, it could pave the way for the bank to be bought out by First Niagara. First Niagara’s application to become a bank holding company, another requirement for the deal, is also pending. Harleysville National Bank reported a $220 million loss for the year, and if regulators do not approve its sale, it might need to raise capital quickly. ◾ A similar merger was called off today. The Jacksonville Bank, in Florida, and Heritage Bank, in Norfolk, Virginia, called off a merger they had agreed on one year ago. The two companies released a statement saying only that the merger no longer made financial sense because of changing market conditions.

The largest bank failure tonight was First Regional Bank, with 8 locations in southern California. It had close to $2 billion in deposits. The deposits are being transferred to North Carolina-based First-Citizens Bank & Trust Company, which is also purchasing nearly all the assets.

In addition to the usual losses on real estate development loans, First Regional Bank had taken losses on loans to real estate investors, including some in Florida.

Nasdaq had sent the bank’s holding company a notice of delisting a month ago, and halted trading in the company before the open this morning. That followed a 3-year slide in which the bank lost more than $120 million and its stock lost 98 percent of its value.

Another billion-dollar bank failed tonight, this one in Georgia. Community Bank & Trust, based in Cornelia, Georgia, was closed by Georgia banking regulators. It has $1.1 billion in deposits and 36 locations in Georgia and Alabama, most inside grocery stores. Some locations used the name Bulldog Bank & Trust. South Carolina Bank and Trust (SCBT) is taking over the deposits and purchasing the assets. The new locations represent a logical geographical expansion for SCBT, extending southwest along I-85 toward Atlanta.

Community Bank & Trust had been operating for 110 years. Its loans for residential real estate development projects ran into trouble in 2009, with about a quarter of loans delinquent by the end of the year.

Also in Georgia, First National Bank of Georgia failed tonight, with $758 million in deposits and 11 locations in western Georgia, generally along I-20 west of Atlanta.

A new bank formed tonight is purchasing the deposits and assets, paying a 1.25 percent premium on the deposits. A press release from the new bank, Community & Southern Bank, identifies its top executives as John Spiegel, former CFO of SunTrust Bank, and Patrick M. Frawley. Frawley has a recent history of managing troubled banks, sometimes succeeding in turning them around.

Florida had its second bank failure in two weeks tonight: Florida Community Bank, with 11 offices between Naples and North Port in southwest Florida. The bank had $796 million in deposits as of September.

The failed bank had almost $200 million in bad loans, representing almost a third of its loan portfolio. An aggressive real estate lender during the boom years, it was just trying to hold itself together over the past year as it absorbed the inevitable losses.

In addition to its losses on loans for failed real estate projects, it lost $6 million on loans to the former CEO of the failed Orion Bank, who is now being investigated by regulators for improper loans he arranged as Orion Bank CEO. Most of the collateral for the loans was in the form of now-worthless Orion Bank stock.

Miami-based Premier American Bank paid a 0.4 percent premium for the deposits and is purchasing 57 percent of the assets. The buyer is the new Premier American Bank formed just one week ago to take over the assets of the former Premier American Bank when it failed. The Florida Community Bank branches will keep the Florida Community Bank name, at least for now.

Washington State closed American Marine Bank, which was based in Bainbridge Island, with 11 locations along the northern Puget Sound. It had $300 million in deposits. Columbia State Bank is taking over the deposits and purchasing the assets, paying a 1 percent premium on the deposits.

Bank officials cited losses on loan participations as one of the reasons for the bank’s financial difficulties a month ago when a consent decree from the FDIC took effect. Loan participations, an arrangement in which several banks share in the gains and losses on a loan made by one of the banks, have been a problem in several bank failures since last year, and especially for two failed correspondent banks that were involved in arranging the participations. In the consent decree, the bank agreed to improve its management practices and strengthen its financial condition.

A smaller bank in Minnesota was closed tonight, with less than $55 million in deposits, but it, in some ways, is the most interesting story among tonight’s bank failures. The bank was Marshall Bank, with three locations in the northwestern corner of state. United Valley Bank, based nearby in North Dakota, paid a 7.35 percent premium for the deposits and is also purchasing the assets of the failed bank.

Marshall Bank was known as Northwestern State Bank until 2003. One of the bank’s problems was a loan to the Nooksack tribe of Washington state for the construction of the Nooksack Northwood Casino, which it built in Lynden, Washington, along the Canadian border. Revenue last year was less than the tribe had planned on, and it ended up in litigation with the bank after it missed interest payments. One of the challenges that banks face with casino loans is that a bank cannot foreclose on a casino without shutting it down, at least temporarily, as a banking license isn’t consistent with running a gambling operation.

The FDIC estimates costs of $1.9 billion for tonight’s bank closings. This month’s 15 failed banks represent a pace of bank failures similar to last year.

Thursday, January 28, 2010

President Barack Obama’s State of the Union address last night didn’t dwell on it, but it touched on the one point that is essential for the U.S. economy to turn around. That is the problem of energy imports. The United States is running a chronic trade deficit mainly because about half of the country’s imports are energy. It will take a large investment to replace those imports with domestically generated energy, and the speech suggested that Obama is ready to get started on that, if not in a big way then at least in a decisive way, this year.

The memorable line from the speech was “How long should America put its future on hold?” That question applies most especially to the issue of energy. We don’t yet know how most of the energy we use can be generated locally, but we have some of the technology we need right now, and the longer we wait to put it into practice, the longer we will wait for the economic recovery that we are counting on to make so many other things possible.

Wednesday, January 27, 2010

Typically, Arctic ice extent slows down at the end of January and reaches a peak early in March, but with the unusual weather patterns of this winter, it may have nearly reached its peak already.

Most of the time, low pressure over the Arctic Ocean ensures that the cold air can’t leak out into the temperate zones of North America, Europe, and the Russian Far East. For most of this winter, though, Arctic air pressure has been higher, sending Arctic air as far south as Florida. The result has been much warmer air near the Arctic Circle, in places like Labrador. There was a period of a week earlier this month when I saw virtually the same temperatures in southern Labrador as in southern Pennsylvania. Today it is happening again, and this pattern may continue into next week. With daytime temperatures rising well above freezing at the edge of the Arctic ice, snow cover is melting away, and any sea ice that forms during the night will tend to melt during the day.

There is little immediate effect on the Arctic Ocean itself, but it’s easy to imagine that an early start to spring nearby could lead to a faster June melt on the Arctic Ocean.

Tuesday, January 26, 2010

U.S. auto sales are up this month, but this is not good news for auto makers. The increase is coming as drivers buy more used cars — and they are paying more for them too, according to AutoLoanDaily.com. As for new car sales, indications so far are for January totals that are lower than December, and lower than last January, though not drastically so. The surprisingly good results in car sales from December mostly resulted from after-Christmas price cuts, and after those sales, there were not so many buyers left for January. Some analysts are predicting January new car sales to come out slightly higher than December or last January as the pace of sales picks up this week, but those projections appear not to have adjusted for the surprise move of car buyers from new cars to used cars this month.

The increased interest in used cars is good news for dealers, however — or at least for the technicians they employ. With used cars selling at higher prices, dealers can sell more used cars by repairing used cars that have minor defects. Used cars are also a good deal for buyers. They cost considerably less than new cars, and the buyers will likely want to trade them in for new-generation car technology within a few years anyway.

The really good news for the auto industry today came in the form of an announcement of an agreement in principle for General Motors to sell the Saab brand to Dutch-English novelty-car maker Spyker. Previous talks had broken down, apparently because Spyker was too small to buy Saab’s factories, but with a pending €400 million loan from the European Investment Bank, with a guarantee from Sweden, it will be able to keep the factories going.

General Motors had started the process of shutting down Saab, and Saab still will have to scale back somewhat to adjust for the global decline in auto sales. Neither Saab nor Spyker has a history of making much of a profit, but by shedding the management practices of its old owners at General Motors, Saab ought to be able to operate much more efficiently. The deal is even better news for General Motors; the half-billion dollars that it gets from the deal (assuming it can eventually sell the stock that is part of the payment it is getting) significantly improves its chance of surviving.

Monday, January 25, 2010

Calculated Risk was looking at housing last week, with a post on falling apartment rents and rising vacancy rates. It is a national trend in apartments and houses both: people are using less housing. This is a situation that defies intuition, especially if you have a few hours of training in supply and demand. If the price of housing is falling as fast as it is, how can demand be falling fast enough to keep utilization rates falling? But really, it’s the natural result of an abrupt shift in perceived income. People have become more reluctant to spend on everything, but especially on big-ticket items like housing.

A year ago, with so many people moving from houses to apartments, I had imagined that apartments might fill up in some areas. I haven’t heard of that happening. Instead, it’s the opposite: more vacant apartments than ever.

There are three trends that might seem to explain the declining use of housing. Foreign workers have been leaving the country because of the difficulty of finding work, more people are homeless or living in tent cities, and builders continue to build housing units of all kinds. Yet these three trends added together are not nearly as large as the increase in vacant housing units. The real explanation is more prosaic: people are moving in with other people. Or they are slow in moving out.

It makes sense if you look at that side of it. When times are tough, you expect people to stick together, to pool their resources, to watch out for each other. With fewer jobs, there are fewer people who need to live in a particular place and more people who need to save money. To put it another way, when there is less action, people are less inclined to go where the action is, but more inclined to go where the people are.

I am sure there are people sitting around together in the evening, shaking their heads at the economy and at their own failed plans, and coming up with new plans and new ideas, some of which really are new. People looking for ways to escape the current economic pressure will, in some cases, generate new business models and new ways of approaching life and work that will change the world forever.

Sunday, January 24, 2010

More people are losing their jobs this month, and while many go on to new jobs within days, others are finding themselves with time on their hands, wondering what to do with it. For anyone in this situation, I tend to agree with the suggestion in What Color Is Your Parachute? of making job-searching your full-time job if getting a new job is your overriding objective. At the same time, though, it may be time to get in shape. This doesn’t have to be a conflict; it takes only about 15 minutes a day to be in better shape than the average American. With 45 minutes of exercise a day, you can be in athletic shape, and if you build up gradually to 90 minutes a day — which still might just be a replacement for the time you had spent commuting — you can look stunning.

Spending an hour a day exercising is not just a way to distract yourself. Exercise can do all this for you:

Improve your health. The exercise itself helps keep your body humming, and if you lose extra weight, that reduces the risks of injuries and some diseases. All the more important if your health coverage has taken a turn for the worse with the loss of a job.

Improve your chances of getting hired, and your salary if you do get hired. If you’re thinner and you move with more energy, it makes employers think you are trying harder and getting more done — and, studies show, they’re more likely to hire you and promote you because of that.

Help you sleep. It’s no secret that unemployment can be worrisome, and that could keep you awake at night, but exercise helps produce the “good tired” feeling that helps you fall asleep quickly and sleep soundly.

Save money. Compared to other things you might try to boost your energy and mood, exercise is cheap. Yes, you’ll have to replace your walking shoes every year or so, but that’s nothing compared to what you might pay for movies, video games, comfort food, or psychological counseling.

Saturday, January 23, 2010

China’s aggressive statements all week, indirectly defending its collaboration with Internet criminal groups, show that the Chinese government really doesn’t understand the seriousness of its problem or the weakness of its position. It may help to remember the reason that companies like Google are in China in the first place. It is to help China get its work done. If China’s reaction to this is to try to steal information from these companies and their Chinese customers, a thought essentially no more advanced than stealing credit card numbers, it shows a country that takes work for granted. Yet if theft is a higher priority to the Chinese government than the massive work that needs to be done in that country, and if it doesn’t mind aligning itself with theft even when it impedes work, there is not much chance that the work will get done.

China faces economic challenges on a scale that no other country has to consider. It is dependent on energy imports to an extent that Japan, the United States, and India can barely even imagine. Its economy is heavily dependent on contract manufacturing, a sector that will hit its peak and begin to decline in just a few years. It faces the prospect of tariffs and boycotts on its exports in less than ten years because of its outsized contribution to global warming pollution. To address these and other challenges will require the full ingenuity of Chinese workers, and that is not what it will get if workers are always looking over their shoulders, defending themselves against attacks by their own government.

If you read the news headlines, this analysis might seem like an overreaction, but the news stories are not emphasizing the nature or scale of the Internet attack that the Chinese government and criminal groups collaborated on against Google and at least 30 other companies based outside of China (along with who knows how many that were operating within China). From what is known about the attacks, though, the number of people working on them must have been greater than the entire Internet staff of some countries. In the follow-up to this event, China finds itself distancing itself from the world in a period in which it needs the world’s help more than ever. The inflexibility in its statements offer no reason to hope that it will turn back. In the future, I believe we will look back on China’s attack on Google as a turning point, marking the high point in the history of China before it turned its back on the world and began the slow disintegration that would inevitably follow.

Friday, January 22, 2010

If there has been a surprise in this month’s earnings reports from the banking conglomerates, it is how much their income depends on playing in the stock market. Wall Street would not have made a profit at all last year if it weren’t for an unprecedented stock market run between March and December, but that couldn’t possibly repeat this year.

It is probably not a coincidence, then, that President Obama introduced a proposal to restrict banks’ securities trading yesterday. Coming at a high point in the stock market, these restrictions could save three or four giant banks from collapse this year if the stock market falls to levels below its lows of last year, as some market watchers have predicted.

The proposed rules also address some of the more grievous conflicts of interest that banks face when they compete against their customers in the stock market.

More importantly, Obama’s proposal shows that he is starting to listen to his economics team, who last year were largely shut out of White House policy discussions. The reason this is so important right now is that some of the economists on the White House team have ideas for stabilizing the financial system, so that the meltdown of 2010 does not have to be as bad as the one in 2008.

That, of course, does not mean that bank failures will slow down. As I mentioned yesterday, huge numbers of mortgages are likely to remain underwater for the next five to ten years, and that means that banks will continue to take losses on foreclosures and short sales. With the continuing losses, banks will be slow to recover their financial strength, and many will not be prepared for the next crisis that hits, whatever form that takes.

A Senate vote on confirming Fed chair Ben Bernanke for a second term has been postponed amid word that there probably are not 50 senators prepared to vote in favor, never mind the 60 needed to bring the matter to a vote. Politically, it is hard to explain Obama’s decision in nominating Bernanke — he is obviously in over his head at the Fed, and to the voting public, the nomination seems a lot like the usual corruption in Washington. Where else can an office holder whose incompetence turned a serious problem into a catastrophe be rewarded by being appointed for a second term? If Obama wanted to appoint a weak Fed chair as part of a plan to gut the Fed, he could easily have found someone more competent in economic matters and more acceptable to the voting public. Bernanke had only 21 percent approval in one December poll of voters, compared to 41 percent disapproval. Apparently, reports at the time that said he was more popular in the Senate were exaggerated. He is popular on Wall Street, but it now appears that may not be enough to get his reappointment confirmed.

There is also speculation that Treasury Secretary Tim Geithner may be on the way out. The policy changes at the White House in the last two weeks are a direct reversal of Geithner’s upside-down approach of saving Wall Street institutions at any cost while letting the banks and lenders that actually keep the economy working go down. Geithner’s approach created a stock market bubble in 2009 but allowed the economy to continue to decline, and he seemed to be caught off guard by the White House’s change of direction this month. As soon as a new Fed chief is in place, people will be watching to see if Geithner’s resignation follows.

What happens when banks that operate in multiple countries fail? The FDIC faced this question recently when a California bank with an office in China failed. That particular failed bank was resolved without creating an international incident, but future bank failures might not be so clear-cut. Some clarity on this might come from a memorandum of understanding released today by the FDIC and the Bank of England. The memorandum of understanding does not have the legal implications of a treaty, but it outlines in general terms the course of action that is expected if a bank that operates in both the United States and the United Kingdom were to fail, and as one official document in a subject area where there is very little written policy, it may serve as a model for banks that fail in any two countries.

The FDIC has signed a lease for a new satellite office, this one in Schaumburg, Illinois, near Chicago. The office will open around March and may, at its peak, house about 500 temporary employees and contractors.

The larger bank failures tonight were far away from Chicago, in the corners of the country. In the northwest, the banks that failed tonight were Columbia River Bank, with $1 billion in deposits and 21 locations in Oregon and Washington, and Evergreen Bank, with $439 million in deposits and 7 locations in western Washington.

Tacoma-based Columbia Bank (also known as Columbia State Bank) is purchasing the deposits and assets of Columbia River Bank. Columbia Bank has a more coastal territory, so the acquisition will give it a greater presence inland.

Columbia River Bank started to show losses in 2008. It closed its mortgage operations, sold off its credit card business, replaced its CEO, and instituted drastic cost-cutting measures that year, but failed to return to profitability. IN 2009, the FDIC ordered it to raise capital and reduce its commercial real estate exposure. It appears that losses from commercial real estate lending caused most of the bank’s financial difficulties.

Evergreen Bank had “severe loan losses” according to a statement by state regulators when they closed the bank today. Umpqua Bank, already a major banking presence in the region, is acquiring the deposits and assets.

Evergreen Bank is not associated with the larger Evergreen Federal Bank in Oregon.

In New Mexico, Charter Bank was closed, but some customers might not notice. The deposits and assets are being transferred to Beal Financial Corporation, through a new banking subsidiary created tonight for this purpose. The new bank is keeping the Charter Bank name.

The failed bank had $850 million in deposits and $1.2 billion in assets. It was based in Santa Fe, though most of its 8 offices were around Albuquerque. The new bank will have its headquarters in Albuquerque.

Charter Bank had reported glowing financial results through 2007, and was expanding to become New Mexico’s largest mortgage lender. Three of its branches had opened since October 2007. At its peak, it had more than $1.4 billion in assets. It mainly emphasized fixed-rate mortgages, which bankers usually consider to have lower risk than adjustable-rate mortgages. However, its determination to write as many mortgages as possible in New Mexico may have left it with too much real estate exposure to manage.

Beal Financial Corporation is the holding company of Beal Bank, a Texas-based lender that was previously about twice the size of Charter Bank. Beal Financial Corporation was founded in 1988 by real estate investor Andy Beal, who is still the majority owner. Five weeks ago, Beal Bank acquired the assets of New South Federal Savings Bank, a mortgage lender that failed in Alabama.

In Florida, also, a new bank was created to buy the assets of a failed bank. State regulators closed Premier American Bank in Miami. The deposits and assets are being transferred to Bond Street Holdings, through its new bank created tonight, which will keep the Premier American Bank name. Bond Street Holdings is apparently owned by a Wall Street investment fund set up last year to invest in failed banks.

The failed bank had four offices in the Miami area, plus a lending office in Coral Gables, and about $326 million in deposits. It had been operating since 2001. It had at least $20 million tied up in foreclosures on failed South Florida real estate development projects.

A small bank in Missouri failed tonight. Bank of Leeton had $20 million in deposits and a similar amount in assets, and a single location. Kansas-based Sunflower Bank is purchasing the deposits of Bank of Leeton, paying a slight premium to the FDIC. The FDIC is retaining most of the assets from the failed bank.

Thursday, January 21, 2010

Media outlets this month have trotted out a series of experts to explain why it’s a terrible idea to abandon your home mortgage. Yet other experts say it’s a smart thing to do in some situations.

I couldn’t help noticing, though, that most of the experts who say that you should never abandon a home mortgage live around cities such as New York and San Francisco — big cities where staying put wouldn’t severely limit a person’s career options.

The fact is, though, that most people don’t live in such big cities, and the advice coming from there may not apply to people who live elsewhere.

First of all, it is important to understand that for many borrowers, the question is not whether they will abandon their mortgages, but when. If mortgage payments are more than 45 percent of pre-tax income, or will be after an upcoming mortgage rate reset, and the mortgage has more than two or three years to run, then it’s almost certain that the money will run out before the mortgage does. If, at the same time, the amount owed on the mortgage is considerably more than the value of the real estate, simply selling the property to pay off the mortgage is not an option. In this circumstance, when you know you can’t afford your home, the best time to get out is right away. Now, while you still have some money left and may be in a position to bargain with the lender. It will do less damage to your credit history this way than if you wait until the money runs out, and that damage will happen sooner, giving you more time to recover. If you can negotiate with the lender to get out of your house, it will cost you and the lender less in the end. Some people are waiting for real estate values to improve before they make this move, but that could be a big mistake — in most places in the United States, real estate values could fall another 15 percent before they level off, and it could be years before they recover to current levels — five years in some places, 50 years in others.

The other common scenario is the worker whose career is stuck because there are no better jobs available near home. If there is a profoundly better job offer elsewhere, or if there simply aren’t jobs anymore in your town, you really have little choice but to pack up and go, whether you can sell your house or not. A worker who gives up career advancement because of a bad mortgage situation could be giving up more than a million dollars in net lifetime income — but more importantly, giving up the chance to make a much bigger difference in the world. Work is ultimately what creates economic value, so it doesn’t make sense to ask anyone to sacrifice work just for the sake of a financial instrument, if this happens at enormous financial cost to themselves.

Of course, for people who work in New York, there is a good chance that none of this applies. Moving is hard work, no matter how good you are at it, so walking away from your suburban home doesn’t make sense if the only rationale is to reduce your monthly payments — and this means most people are better off continuing to make the mortgage payments. Evicting yourself from your own home when you don’t need to is not a financial strategy.

It helps to put the situation in perspective when you realize that about half of the people who are making payments on their mortgage owe more than the real estate is worth. It’s not a bizarre situation affecting just a few people. Realistically, though, these homeowners won’t stay put forever — only for an average of about five years, until work eventually requires them to move. Five years of mortgage payments may not lead to any increase in home equity in places where real estate values have not yet leveled off, so the financial problem won’t go away.

But this also means that foreclosures and short sales will remain high throughout the 2010s. Whenever someone who owes more on the mortgage than the house is worth has to move out, the lenders have to get involved, often at a loss, and the real estate market is affected. When you look at it this way, the people in banking who fantasize that the industry will somehow get the money out of the borrowers are deluding themselves. Here is another way to look at it. Suppose all these homeowners were to just stay in their homes till they died. Many would die still owing more than the house was worth, and the high mortgage payments would mean they would die with few other assets. Private mortgage insurance might cover the deficit, but the insurance industry does not have the financial strength to bail out the banking industry on this kind of nationwide scale. So that is not a solution either.

Before the mortgage crisis hit, I think many people did not realize how much of the real estate in the United States was owned by the banks. When we look at the situation now, with banks effectively owning more than half of the buildings in the country, it’s easy to say that that’s too much real estate risk for the banking sector. The rules of banking need to be changed to somewhat discourage banks from real estate loans in order to reduce the real estate risk on the banking sector as a whole.

Wednesday, January 20, 2010

I commented yesterday about declining crime rates, and I want to continue that thought on my second day of jury duty. How could crime rates fall during a recession? Part of the link, I believe, is drugs. We know that prescription drug sales peaked a couple of years ago and have been declining as Americans become more skeptical about the value of drugs. I believe this change in attitude extends to all drugs, including alcohol and illegal recreational drugs. The decline in personal income may have accelerated this, as people hold on to their money and spend less on discretionary items such as drugs. Evidence of this can be seen in the decline in the reported street price of some drugs and the decline in advertising for beer and hard liquor. The new scandal about people sickened by two years of moldy Tylenol will surely add to the new skepticism about drugs.

What does this have to do with crime? Aside from the drug crimes themselves, which obviously could shrink if people are buying less, crimes tend to occur when people aren’t thinking straight — when they are making bad decisions because their brains aren’t working well. And this is a known effect of drugs generally. It’s a cliché when it comes to certain recreational drugs, but it’s also a known or suspected effect of most medical drugs — that’s part of the reason drug instructions may include a caution about driving and operating heavy machinery. They might as well also warn against getting angry and doing something stupid. With people being more skeptical about drugs, it’s no surprise if crime declines more or less in proportion.

Tuesday, January 19, 2010

Today I am on jury duty. My chance of getting called to serve on a jury is low, however. In part, this is because crime rates are falling. Most statistics show U.S. crime falling since the late 1980s, and the decline has accelerated during the recession. From traditional economic theory, you expect crime to increase during a recession, but this is just another indication that the recession is not what people think it is.

Monday, January 18, 2010

The ongoing spat between China and Google shows China to be in a far weaker position than most people had imagined.

The key point that is known about the incident is that there was a coordinated attack from within China on Google Mail and at least a dozen other foreign companies. From public statements about the incident, it appears that it could only have been conducted by a collaboration between the Chinese central government and organized crime groups within China. Only the central government would have the ability to manipulate name servers locally and in real time, in response to the actions of individual Internet users, as was apparently done. Only organized crime groups would have the botnets to give the attack the scale that it had. The description of the attack suggests a precision of timing that could only have occurred with explicit coordination.

Collaboration between a central government and organized crime is something that is rarely seen outside of failed states such as Iran. Yet the tough talk from China on this issue strongly suggests that, to them, this criminal episode is considered business as usual. This kind of corruption, in other countries and other places, has made it almost impossible for businesses to function. That the Chinese central government accepts and endorses it is an extremely troubling sign for the future of the Chinese economy. Of course, if the economy falters, the government will also, not too long after.

China, more than any other country, sees itself as the center of the world. In part this is because it has so many bright people. Yet that is irrelevant, economically speaking, if the government is so intent on keeping people from getting their work done. The Chinese central government may have logical justifications for its paranoia, but driving the world’s last great empire into poverty — the inevitable result of the track China has now shown it is on — is not the answer.

Sunday, January 17, 2010

U.S. gasoline prices might be 8 cents higher than a week ago and higher than they were all last year, but that doesn’t mean they won’t go up from here. Gasoline is usually at its lowest prices in January, and I haven’t seen anything to indicate that its seasonal tendencies have changed much. Prices usually go up from January to June, and that is likely to happen again this year. Gasoline prices may not shoot up, but they could creep up 10 to 20 percent over the next five months. I expect summer gasoline prices to remain over $3 a gallon everywhere in the United States.

Saturday, January 16, 2010

The United States responded more decisively to the Tuesday earthquake in Haiti than it had to the hurricane and flooding in New Orleans five years ago. The U.S. military was called into action sooner, for example, in spite of the fact that the earthquake hit with no advance warning and its severity was not well understood until the following morning. Compare that to the two days of official hurricane watches and warnings prior to Hurricane Katrina, and you can see that the contrast in response is a matter of will rather than ability. It is a sign of a country more interested in responding to security disruptions than it was under the previous administration.

There are, to be sure, complaints about the slow progress of relief efforts, but the delays are not the result of indecision. They are caused instead by the tremendous difficulties in traversing roads and ports when tons of rubble are blocking the way. Security issues, in a country where the police force was hit as hard as anything else, have compounded the difficulties.

Some have said that the widespread destruction in Haiti was the result of poorly built buildings. That too is the wrong way of looking at it. It is true that many of the buildings in Haiti were not designed with earthquake resistance in mind. The same can be said for any area that has not had a major earthquake in two centuries. It is easy to see in the photos from Haiti that buildings that were properly constructed also came down. The right way to look at the situation, then, is that the damage was caused by the nature of the earthquake, rather than by the nature of the buildings.

Friday, January 15, 2010

That line gives you an idea of the unapologetic tone President Barack Obama took yesterday in proposing a 10-year tax on the liabilities of financial conglomerates with assets of $50 billion or more. Although he couldn’t directly say so, the money in question was mostly the money funneled by the U.S. Treasury to the large banks by way of the credit default swaps of the otherwise bankrupt insurance giant AIG (though who got what via AIG is a closely guarded state secret). It is not just a change in tone, but a change in policy. The White House apparently recognizes that the financial sector is too large for the post-bubble economy and should be discouraged at this point from growing larger.

The FCIC (Financial Crisis Inquiry Commission, no connection to the FDIC) began public hearings this week to find out what caused the financial crisis. Testifying yesterday, Sheila Bair, head of the FDIC, cautioned about the rapid growth of the unregulated “shadow banking system,” which is now about as large as the traditional, regulated banking system. Securities regulations aren’t of much use in accurately labeling mortgage-backed securities, she said, but banking regulators currently have little authority over them. Bair called for regulatory incentives for financial institutions to become smaller and simpler so that they do not present the same degree of systemic risk, and for new regulatory authority to seize and wind down financial conglomerates that go broke in the same way that failed banks are currently resolved.

China is raising reserve requirements for banks. Banks there are required to keep more money in reserve, which means they will have less to lend. The move appears to be motivated in part by banking regulators’ concern that Chinese banks have started to lean toward high-risk loans.

The FDIC found a buyer for almost half of the assets of the recently closed Independent Bankers’ Bank, which was kept operating as Independent Bankers’ Bank Bridge Bank. The buyer is another correspondent bank with a nearly identical name, TIB The Independent BankersBank, based in Irving, Texas. Despite the similar name, the acquiring bank had no prior connection to the failed bank. TIB is buying 42 percent of the assets and is assuming all the deposits. Another buyer, Empire Advisory Group, is buying the corporate trust department for the minimal price of $119,000.

Barnes Banking Co., in northern Utah, failed tonight. It had 10 locations and $787 million in deposits. The FDIC has created a bridge bank that will operate for 30 days to allow customers time to move their accounts, but customers should begin immediately Tuesday morning to make other banking arrangements. Zions First National Bank will be providing operational management for the bridge bank. The FDIC will be mailing checks to CD and IRA account holders.

The bank had been operating for 118 years. It started to show cracks around 2007 and was under regulatory scrutiny by 2009. A prompt corrective order from the Fed issued a month ago had a deadline of today. The bank had held a series of special stockholder meetings, the last one yesterday afternoon, to try to find some resolution to its capital problems. The closing will cost the FDIC an estimated $271 million.

These small banks with less than $100 million in deposits between them failed tonight:

Town Community Bank and Trust in Antioch, Illinois. Deposits and 97 percent of assets transferred to First American Bank.

St. Stephen State Bank in Minnesota. Deposits and assets transferred to First State Bank of St. Joseph.

Thursday, January 14, 2010

California’s debt was downgraded again as Standard & Poor’s worried about the state’s cash flow in March and April. Tax revenue has been less than the state’s budget called for — $20 billion less — and it could run short of money for a few weeks while waiting for income tax payments to come in in April.

California is not the only state where the budget is not working out as planned, and many local governments, depending heavily on taxes on employment and real estate, are faring worse. This is leading to massive job cuts this month, and the situation for state and local governments may get worse before it gets better, as employment and real estate values have not yet hit bottom in most of the country.

The problems in California may also hint at future problems for the U.S. government. The idea of U.S. government debt being rated anything less than the best has traditionally been unthinkable, but if we have learned anything from the last two years, it is how quickly things that seem permanent can change. A flight to quality ironically favored U.S. government debt in 2009, but that may not continue this year. Economic conditions will be improving faster in most of the world than in the United States. At the same time, the United States, with its greater dependence on oil imports, faces a greater risk of inflation. If investors turn elsewhere, the U.S. government may have to adjust by borrowing less.

Wednesday, January 13, 2010

There has been some talk this week about taxing banks and Wall Street to pay for the damage they did to the financial system. Most of the discussion has to do with how to select risk metrics that target the kind of high-risk speculation that killed Wall Street.

Fundamentally, this is a terrible idea. If you create metrics, Wall Street will find a way to bypass them. For example, if the tax is based on the size of performance bonuses to employees, the banks can move those functions outside the company and still pay the bonuses.

I have a better idea. This is something I’ve mentioned before, but it’s time to say it again. There should be a tax on all derivative trades. This tax should be based not on the value of the derivative, but on the value of the underlying assets. For example, when a mortgage-backed security is sold, the tax would be calculated based on the unpaid balances of all the mortgages it refers to. If the underlying assets are derivatives themselves, then the basis for the tax would be the underlying assets of those derivatives. This avoids creating a loophole that would allow some derivatives to be taxed differently from others.

I would suggest a tax rate of 0.1 percent to start. I know that rate is high enough to make Wall Street traders scream, but the truth is, a derivatives contract is a bet, and it’s the nature of betting that created the systemic risk that led to the Wall Street collapse. Part of the purpose of the tax is to reduce the gambling mentality of Wall Street in order to reduce the systemic risk that the gambling creates.

Here is another way to look at it. If a derivative covers a $200,000 mortgage, then the tax would be $200. That’s not so much to pay. If people are trying to pass off $200,000 worth of risk exposure in a transaction that can’t withstand a $200 tax, that means that the people involved are passing risk around without paying enough attention to what they’re doing. And that’s absolutely true, the way Wall Street works today, and the lack of attention is absolutely destructive in a financial sense, as we have seen over the last three years and will be seeing again this year. The $200 tax doesn’t force people to give the transaction the level of attention it requires, but at least it prevents companies and investors from entering into these derivative contracts as if nothing is going on, which is the way it still happens every day on Wall Street. Most derivative exposure is considered so ephemeral that it is not even recorded in companies’ accounting systems until a loss occurs. That is something that has to change.

There is one more point I have to repeat again and again, at any excuse. There is no basis for pretending that we have done anything at all to reform the financial system as long as derivative contracts remain secret. The initial step that is urgently needed is to require everyone holding a derivative contract to publish it in a standardized form on the Internet. Only after we know what derivatives exist will we know the extent to which Wall Street is still teetering at the edge of a cliff.

Tuesday, January 12, 2010

The Wall Street Journal this morning emphasizes a point that serious economists have been warning about for more than two years: many of the jobs lost in the recession are gone permanently. That’s because the industries that have lost the most jobs are still unsustainably large, and will almost certainly have to shrink further over the next five years. The trend is obvious enough about construction and finance, which in two years have declined only 20 percent and 6 percent, respectively, but is more decisive in smaller niches:

In other areas of the labor market, the recession accelerated job losses that were probably coming anyway. In November, there were 36% fewer people working in record shops than two years earlier, according to the Labor Department. There were 23% fewer people working at directory and mailing list publishers, and 46% fewer at photofinishing establishments. Those are jobs that, with the advent of mp3 recordings, Google and digital photography, were likely disappearing anyway.

The Wall Street Journal does not mention this, but there are plenty of other overheated industries that are likely to decline in the coming years, even if they have mostly avoided this so far: health care, education, and defense, to name three of the largest. (The Wall Street Journal cites a projection for a further increase in health care from the Department of Labor, but then cautions that these extrapolations tend to look wacky in retrospect.)

Permanent job losses occur every year, but with five years’ worth hitting during what was effectively a national hiring freeze, it will take years for the economy to recover. This is what prevents a bounce-back recovery. The economy can bounce back when employers fill job positions that they have temporarily left vacant. Creating new jobs is a slower process, and at this point, may not be able to keep up with the additional job cuts that are already planned.

Monday, January 11, 2010

Freezing nights over most of Florida this weekend and the first snow since 1996 (the first in Orlando since 1977) damaged crops that don’t respond well to freezing. The coldest period occurred in the last four hours, with freezing temperatures extending as far south as Tampa. The weather should warm up quickly now that the sun is up, and the forecast for this week says that the cold snap will be easing. The overnight freeze damaged citrus fruit especially in the inland areas north and west of Orlando. This morning, the industry is checking to see the extent of the damage.

There is a checklist of questions: How cold did it get? Where did the temperature stay at 27°F or below for four straight hours? How far does the ice extend into the fruit? How much of the crop was damaged? How many trees were damaged? The weather observations and early reports suggest that there is extensive damage to citrus fruit in two or three counties, but so far, little indication of damage to trees.

Analysts are taking whatever news they can get and using it to estimate the extent of the crop losses. These estimates will largely determine the way the prices of oranges and other citrus crops change today and in the next couple of weeks. Orange juice futures have fallen 10 percent early this morning, for example, as analysts conclude that the damage was less than they had expected when they read the weather forecast on Friday.

Sunday, January 10, 2010

A week after I complained that the 00s were directionless when it came to fashion, I’ve spotted a new fashion trend. It is another of the self-limiting trends that we’ve seen in recent years, but at least it shows that fashion is still alive.

The new trend is red — solid red. Red has always been a popular color, of course, but I am seeing twice as much of it so far this year, and that’s enough for me to call it a trend. I think it could be as big as black was three winters ago.

The red fashion trend can happen now because it doesn’t depend on people buying new clothes. Many people, of course, would simply never wear red — they would feel too conspicuous. But if you’re bold enough to be seen in red, there is a very good chance that you have red already in your closet.

The problem with red is that, like black or brown, there isn’t much individual expression in it. There is nothing unique about wearing red, and the more red you see, the less distinctive it is. That means, the bigger the red trend gets, the faster it will disappear, as people set their red aside for something that makes them feel like an individual again.

Saturday, January 9, 2010

In 2008, high fuel prices led U.S. drivers to driver less total distance for the first time ever. In 2009, it was the number of cars that declined. The United States actually scrapped more cars that it put into service, reducing the total number of cars by nearly 2 percent.

This brings up the obvious question: if we’re scrapping cars faster than we’re making, do we really need to be making more cars? The simple answer is no. We could keep the cars we have running for as long as we wanted to. Look closer at the question, and you would say that there is some need to make new cars, both for the thrill that buying a new car provides some people and to replace cars that are so damaged that they are impractical to repair. But the need for new cars is not nearly as great as most people imagine. If we’re going to be making cars at a time when it’s not strictly necessary, we might as well be making very good cars — safe, efficient, reliable, easy to repair, and so on — and that has not exactly been the emphasis of the automobile industry in my lifetime.

Well, perhaps car buyers came to that conclusion. That would explain for the drop-off in new car sales in 2009. There are a lot of cars — seven cars for every six drivers — so it’s easy to imagine that the total size of the U.S. automobile fleet could shrink some more.

Friday, January 8, 2010

Greed. Executive bonuses. Thirty percent interest on credit cards and zero percent on savings accounts. The fastest pace of home foreclosures in history. Fine print. Hidden fees. Accounts canceled without explanation. There were a lot of reasons for customers to dislike banks in 2008 and 2009, and they may like them even less when 2010 is over. That’s because the practices that have made banks so unpopular are being given fresh emphasis as the new year gets going. Some of the Wall Street banks, even as they struggle to show a profit, are announcing a return to bubble-era bonuses. The large nationwide banks especially are planning new service charges and new hidden fees, and are accelerating their efforts to cancel credit card accounts that might be risky. Bank executives, in planning these moves, assume that customers ultimately can’t go anywhere else, and they might be right. But if they are wrong, some of the major banks could lose their retail customers and deposit bases this year, and could be forced into some form of government receivership.

Treasury Secretary Tim Geithner has been called to appear before a House committee after e-mail messages from his previous job at the Fed suggest that he instructed AIG not to disclose information about its credit default swap (CDS) payments, which at the time were being funded with public money. The White House and Fed issued statements supporting Geithner today, but the statements raised more questions than answers and seemed to offer very limited support to Geithner, suggesting that he may be on his own on this matter.

Bank of America starts the year with a new CEO, insider Brian Moynihan. The bank has the unenviable task of restoring what may be the most tarnished brand in banking while fighting off legal difficulties, retaining customers while figuring out new ways to get money from them, and keeping the company from falling apart financially without the degree of government help that it leaned on all last year. With multiple disasters happening all at once, the bank really had no choice but to hire one of its current executives. There was no time to train someone new on how things work inside that crazy-quilt of a bank. Moynihan’s experience in bank operations may help him rationalize some of the more inexplicable acquisitions the bank has made in recent years, so that they go together in a businesslike way.

The FDIC today completed an auction for $1 billion in failed bank assets. A real estate investment company bought a 40 percent share in the portfolio of 1,200 commercial real estate loans from 22 failed banks, mostly in Georgia, California, Nevada, and Florida. Most of the loans are delinquent and all are distressed, according to the FDIC. The FDIC will retain a 60 percent share in the portfolio.

The global banking system entered 2010 looking no more healthy than it had at the beginning of 2009. I mentioned some of the issues yesterday. Iceland’s referendum on adding a sovereign guarantee to its deposit guarantees on the failed IceSave accounts, belonging to depositors mostly in the United Kingdom and the Netherlands, will probably be held in the second half of February. There is trouble also in Argentina, where the president’s plan to raid the central bank for money to pay back foreign debts was halted by the courts today. Courts issued an injunction against the planned partial liquidation of the central bank and ordered a review of the president’s attempt to fire the head of the central bank.

There were several actions on credit unions at the end of the year.

On New Year’s Eve, the NCUA liquidated HeritageWest Federal Credit Union, which had 40,000 members and was based in Tooele, Utah. Member accounts were moved to Chartway Federal Credit Union, which otherwise operates in East Coast states, Arkansas, and Texas. There were a total of 15 credit union liquidations in 2009.

Also on New Year’s Eve, First Service Credit Union, which had 6,000 members in eastern Wisconsin, announced that it was merging into Marine Credit Union, a larger credit union also based in eastern Wisconsin. First Service Credit Union had been losing money in 2009.

The previous day, the NCUA, in its capacity as conservator of WesCorp, asked a federal court to make it the plaintiff in a lawsuit against former officers of the corporate credit union. The suit claims the officers took inappropriate risks in investing the credit union’s money in derivatives.

Tonight the NCUA recorded the first credit union failure of 2010. It liquidated Kern Central Credit Union, in Kern County, California. The failed credit union had 8,000 members and $35 million in assets. Its member accounts have been transferred to Self-Help Federal Credit Union, which is twice as large and based in North Carolina.

Banks are now preparing their December 31 balance sheets. For banks that don’t have a high proportion of recent commercial real estate loans or a large exposure to securities markets, this year-end balance sheet should give a pretty good indication of whether the bank will survive the recent credit bubble or not. Banks that have a significant dependence on securities and commercial real estate may have to wait another 5 to 10 quarters to find out whether they will get through intact.

The first bank failure of the new year was a billion-dollar bank, Horizon Bank, based in Bellingham, Washington. It had 18 offices mostly on the outskirts of the Seattle-Tacoma metropolitan area, and $1.1 billion in deposits. It is not related to the many other banks elsewhere in the country that use the same name.

State banking regulators pointed to losses in the bank’s real estate development and construction loans. Those categories accounted for about 90 percent of the bank’s loan portfolio. Many other banks that focused on the high-growth areas at the outer edges of metropolitan areas have had similar trouble.

Horizon Bank had reported losses of more than $100 million last year. Its stock value had fallen from a peak of $25 at the beginning of 2007 to around 20¢ at the end of 2009, and two weeks ago, it received a delisting notice from Nasdaq. The bank had been operating under a cease and desist order since March, and received a prompt corrective action order in the middle of December.

Washington Federal Savings and Loan Association, which is based in Seattle, but has more than 150 locations extending from Washington to Texas, is assuming the deposits and purchasing the assets of the failed bank.

Thursday, January 7, 2010

More than a year after liquidity problems swept across the banking world, a great deal remains unresolved. This is a sampling of what’s going on around the world as 2010 gets started:

Iceland will hold a referendum on whether to repay $5 billion in savings lost by depositors from the Netherlands and United Kingdom when Landsbanki and its other two major banks collapsed. The referendum happened after only the second veto in the country’s modern political history. Some citizens say the country cannot afford the cost, which would add $18,000 per person to the country’s foreign debt. A narrow majority in the legislature, though, voted for the measure as a way to enhance Iceland’s prospects for European Union membership.

Egypt has adopted a regulation to allow cash-strapped banks to use foreclosed real estate to repay loans to the government. The government does not yet know what it will do with all that real estate.

Dubai tried to put a brave face on its $100 billion debt load, as it finally opened the world’s tallest building this week. Construction on the 200-story building had been delayed twice because of problems with financing the project. In a nod to the suspense surrounding its financial condition, it named the new tower after the head of Abu Dhabi, which has been instrumental in rescuing Dubai. State-owned Dubai World has effectively kept up with its interest payments so far, but will be sending creditors this month a formal proposal to freeze payments for a period of time.

The Basel Committee, an organization represents the central banks of about 30 countries, is working on new rules that would prohibit some of the abusive contracts and practices that led to the financial crisis, and would require more disclosure of risks taken by banks. It is expected to isse a draft of the new rules this month.

Wednesday, January 6, 2010

Some of this is the inevitable result of the recession and the financial factors that led into it. People can’t easily change jobs, and workers are more reluctant to complain about problems, so jobs really aren’t as good as they would be in better times. Many people couldn’t move to take a better job even if one were offered because they owe too much on their home mortgages. Financial factors are also not inspiring to workers: most wages are not rising, costs of commuting and health coverage are taking an increasing cut of paychecks, and the revelation that executives are taking 20 to 30 percent of many companies’ payrolls is discouraging to many workers. Employer attitudes are probably the biggest factor, though. With so many more applicants than job openings, it is easy for businesses to view all their workers as replaceable. At the same time, most businesses are facing enormous challenges that prevent them from thinking about less pressing concerns such as worker morale.

Declining job satisfaction is a long-term trend, according to the Conference Board, cutting across age groups, economic outlook, and all of the components of workers’ opinions of their jobs.

Low job satisfaction is more than just a nuisance. It is a risk factor for the economy. It was low job satisfaction that ultimately killed the old Soviet economy and led to the breakup of the Soviet Union. Workers there became so convinced that their companies’ managers were sabotaging all their efforts that they stopped taking the initiative to solve problems. The situation in the United States is well above Soviet levels, but still, you don’t have to look far to find workers who are working just enough to get by because their employers have let them know that any additional effort would go to waste. (Some people believe it was the war in Afghanistan that led to the collapse of the Soviet Union, but if that’s the case, the United States currently has that risk factor too.)

There is one morbid irony in the falling job satisfaction in the United States that has to be mentioned. It’s hard to love a job when you keep working more and more hours just to pay for the health coverage that comes with it, and Congress is considering a measure to make this connection mandatory. The great irony here is that low job satisfaction is the #2 risk factor for heart disease. Among risk factors, it is second only to unhappiness. Heart disease, of course, is not a minor category of disease, but one of the most deadly. The idea behind the American system of forcing people to work, peasant-style, for health coverage, is that access to medical treatment will help people stay healthy, but this approach may be doing the opposite. It may actually be reducing people’s health by taking away their job satisfaction.

Tuesday, January 5, 2010

One of the surprising trends of 2009 was consumers doing energy audits of their homes. Granted, it’s one of those things that a lot of people say they should do someday, but last year, millions of people took the initiative and found the time to actually do them — even though there was no big corporate marketing push to make them pay attention to the issue. Some people were pushed to do the home energy audits by the need to save money on their utility bills, which can be a considerable incentive. Others, though, were not entirely convinced that they would save money, but went ahead with it anyway.

The implications of home energy audits for the larger economy are considerable. With 50 to 100 hours of careful observation and remediation (using mostly inexpensive materials), a homeowner can typically cut home energy consumption by 20 to 30 percent. That is a big enough change, if a lot of people do it, to change the balance of the economy at large.

What is surprising is not the magnitude of the change — dozens of other changes that are just as important are happening all at once — but the fact that it’s happening at the grass roots level, with no central planning, no television advertising, and very little profit to be had for the corporate sector. The planning system is, perhaps, loosening its grip on the economy.

Monday, January 4, 2010

I saw more shoppers out this weekend than on any two days in November or December, and anecdotal reports from others corroborate this. This says to me that shoppers are ignoring, or at least defying, the stereotypes about doing most of their shopping in the weeks leading up to Christmas. This, of course, is not the first instance in recent years of consumers not going along with conventional commercial expectations of them. We have seen people at large getting older, but taking fewer drugs and spending fewer days in the hospital; canceling home telephone service and other subscription services; driving less for the first time in history; abandoning credit cards for debit cards and cash. All of these moves were pointed out as possibilities by industry observers, but all came as surprises, and are still largely dismissed as anomalies, by the consensus economic views reported in the media. My feeling is that more unpredictable changes are on the way from consumers this year and especially next year. Those of us who are trying to follow the economy will need to pay more attention than usual to what consumers are actually doing, and rely less than we normally would on our expectations of what consumers should be doing under the circumstances. Our expectations are based on stereotypes, and while most of the old stereotypes will still hold, we will surely be surprised by some of the previously reliable stereotypes that fall by the wayside.

Sunday, January 3, 2010

Yesterday I wrote about the troubles in the television industry. Television’s troubles are all centered around the idea of requiring viewers to pay a subscription fee for access to television programming. More than half of the money a cable system collects for a standard cable package goes to pay these fees, and for premium services, the proportion is higher. If the television industry could get over the idea that it needs to charge subscription fees for content, its problems could be solved rather easily.

It’s worth noting that television is not the only industry that has been having problems with the subscription-for-content model. Last year was a brutal time for newspapers and magazines, which largely depend on paying subscribers. Last year was also the end of the last major U.S. record club, an arrangement that resembled a subscription, and the attempt to replace it with a more pure subscription model fizzled. Every year five or ten startups try to launch music subscription services, and so far, not one has caught on with the public. Satellite radio, which gets virtually all its revenue from subscription fees, is barely limping along, and now must find a way to hold on to its subscriber base while it implements further cuts in service. Hundreds of newspapers have charged annual fees for access to their web sites over the years, only to find that approach costing them more in public presence than they gained in revenue.

Subscription models may simply be too intrusive. Any subscription arrangement demands the customer’s attention again and again over the course of the year. People sign up for subscriptions with the best of intentions only to find that they do not have time to keep up with them. It’s no wonder if, after a few years, they decide they want out.

Saturday, January 2, 2010

The Fox television network’s threat to pull its stations off of a major cable system was narrowly averted with a late-night extension on New Year’s Eve, but the reprieve will not last forever. Even if Fox decides to keep its channels on cable, the current system for distributing television in the United States is close to the breaking point, and it could all start to unravel as soon as this year.

It’s the cable systems that are in the middle of the action in the television industry drama. The channels they carry want them to pay more, a lot more, to cover the cost of creating the programming. According to reports, Fox was asking for $1.00 per subscriber per month. Even if that is somewhat more than the cable systems end up paying, fees at that level, if they catch on across the industry, could increase the subscription fee for a typical standard cable package from about $100 a month to about $200 a month. But most cable subscribers feel like they are paying too much already. They are looking for ways to pay less.

If the industry keeps going the way it is going, here are some of the first ways it could start to break down:

One of the major broadcast networks, such as Fox, could pull all its stations off of cable.

Major cable channels could demand higher programming fees, and could start to be dropped by cable systems.

A few of the smaller cable systems could refuse to pay any programming fees, dropping channels that require them, in order to reduce the fees they charge their customers.

Larger numbers of cable subscribers could balk at the higher subscription fees and cancel their television subscriptions entirely.

The important thing to note is that as soon as any of these things start to happen, they will tend to feed on each other, and the situation could snowball. For example, if Fox pulls its stations from cable, that could lead more cable subscribers to cancel. And if that happens, the programming fees available to cable channels will shrink, possibly leading the channels to ask for higher fees. That, in turn, could lead cable systems to drop those channels — and so on.

A wild card in this situation is possible intervention by Congress or the FCC. If cable fees go up to $200 a month, Congress will probably intervene with legislation that changes the rules of the industry. One proposal that was floated three years ago would have permitted cable customers to subscribe to channels one by one. Most cable households only watch about ten channels, and if many of them decided to subscribe only to the channels they actually watched, the revenue available to the whole industry would fall precipitously — but viewers would save a fortune.

The way out of this morass, in my opinion, is for the whole television industry to cut its production budgets so that they don’t rely on programming fees at all. This is fair enough, if you consider that most television channels dedicate nearly one minute out of four to commercial messages — shouldn’t the advertising revenue be enough to pay for the cost of creating the programming? TV producers will have to look for ways to cut costs that won’t degrade the viewer experience too much, but there has to be a way to make that happen. The alternative, after all, is what is happening now. If present trends continue, it won’t be too long before live television is priced out of the reach of the average household, and where will television’s revenue come from then?

Friday, January 1, 2010

According to the way the digits fall in the calendar, today is the start of a new decade. I think this sneaked up on people. Ten years ago, people celebrating a new millennium tried to throw the biggest party the world had ever seen. Last night, celebrations were scaled back. Partly this was because of financial concerns, but partly because people were so busy dealing with all the other changes going on that they didn’t have time to get anything big together.

I am optimistic about the way people will handle the rapid changes that will be coming along this year and perhaps all through the decade. Two recent news items bolster my optimistic outlook. A consumer survey released yesterday showed that people were optimistic about their personal and family lives even as they predicted new problems in the economy and job market this year. This says to me that people are emotionally prepared to respond to whatever changes they encounter. Also yesterday, a crime report showed the murder rate at the lowest level it has been in my lifetime. Murder tends to happen when people are not thinking, but just reacting emotionally without any sense of proportion, so I would like to think a lower murder rate is a sign that people are thinking more clearly.

It used to be said that change was the only constant. Now we know that even change has to change. Either way, change is a funny thing, and it doesn’t pay to take it too seriously.